Education / Outreach
Special Needs Trusts
Special Needs Trusts Can Preserve
Eligibility for SSI and Medicaid
Many people with disabilities are dependent upon government benefits for income. To be eligible for government benefits such as Supplemental Security Income (SSI) and Medicaid, individuals with disabilities must not exceed certain income and asset levels. These requirements ensure that recipients stay in poverty.
To improve the quality of life for recipients of these benefits, their parents and other family members often supplement the benefits by paying for extras such as clothing, furniture, recreational activities, vacations, special celebrations, and even medical treatments not covered by Medicaid.
Family members who provide such extras often contemplate how they will be provided to the person with the disability when they die. If they do not do estate planning or if they leave money directly to the person with the disability in their wills, the person may receive property outright, thus making them ineligible for their SSI and Medicaid until the property has been used up. In addition, the inherited property may be seized by the government to reimburse it for the cost of providing care.
Some parents consider disinheriting their son or daughter thus preserving the right to government benefits but leaving the child without the extra benefits that the family members provided when they were alive.
Therefore, family members who want to assure their relatives can get both extras and SSI must use more complex estate planning documents called trusts. A trust is like a contract. The person creating the trust, called the grantor or the trustmaker, gives the property to another person, called the trustee, to manage for the benefit of a third person, called the beneficiary. In this case, the beneficiary would be the person with the disability. The trustee holds title to the property and has responsibility for managing it. Like a contract, the arrangement is governed by the terms of the trust document. The grantor can direct how the property is managed and how it should be used.
By merely making a gift in the form of a trust, however, a family member does not escape the problems of an outright gift. If the trustee is given broad power to provide for the support of the beneficiary, the trust is considered a support trust and the beneficiary will become ineligible for government benefits until the property in the trust is used up.
However, a trust that is set up properly can provide the beneficiary with extra benefits while preserving his or her eligibility for government benefits. Traditionally, this type of trust is called a discretionary supplemental needs trust.However, federal law recently created two other options. These options are discussed below.
The discretionary supplemental needs trust gives the trustee discretion as to when to distribute principal and income but requires that distributions be made only for "supplemental needs," such as the extras discussed above. The trustee could not pay for the beneficiary"s rent or grocery bill but could pay for a birthday party or a special vacation. When the trust is worded correctly, it does not jeopardize the beneficiary¹s eligibility for government benefits, and the trust property cannot be seized to pay for care the beneficiary is receiving. The person with the disability cannot set up this trust, only friends or family members can.
The Special Needs/Payback Trust, recently created by federal law, provides another option for beneficiaries who are considered disabled under Social Security or SSI definitions. This trust also provides money for extras but not basic support.
Unlike the discretionary supplemental needs trust, this trust can be created by a family member or by the person with a disability if the person experiences a sudden windfall such as an inheritance or award in a personal injury case.
However, there are some disadvantages. First, after the beneficiary dies, the state must be reimbursed for the cost to care for the beneficiary. In addition, in order to preserve benefit eligibility, it is important to get court approval of the trust.
The Special Needs/Pooled Trust provides many of the same benefits as the Payback Trust. The trust can be created by a family member or the person with a disability and the assets can be may used to provide extras. In this case, however, the person with the disability creates a sub-account at a non-profit organization that maintains a pooled trust. The non-profit serves as the trustee. Any property remaining in the trust when the beneficiary dies is transferred to the non-profit to assist other people with disabilities. It is also important to get court approval of this trust.
Careful estate planning allows people to provide for their family members who are dependent on government assistance. However, these provisions should be part of an entire estate plan that meets the needs of everyone involved. For more information, consult an attorney who is skilled in special needs trusts. To schedule a workshop in your area on this topic, contact UCP Michigan at (800)828-2714 (in Michigan) or (517)203-1200.
by Ellen Sugrue Hyman, J.D.
Jan. 2000
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